Red Company had an involuntary conversion on December 23,2016.The machinery had been acquired on April 1,2014,for $49,000 and its adjusted basis was $14,200.The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it.This was Red's only casualty or theft event for the year.As a result of this event,Red initially has:
A)$10,000 § 1231 loss.
B)$10,000 § 1245 recapture gain.
C)$4,200 casualty loss.
D)$4,200 § 1231 loss.
E)None of the above.

Question

Quizplus · Accepted Answer

The insurance proceeds of $10,000 represent the amount of the realized loss, and Red's adjusted basis for the machine before the casualty was $14,200. Therefore, the realized loss is $4,200 ($14,200 - $10,000). This is a casualty loss and not a § 1231 loss or a § 1245 recapture gain since there was no sale or exchange involved.

Red Company Had an Involuntary Conversion on December 23,2016